Domestic Reverse Charge VAT for Construction Businesses in the UK

On March 1, 2021, the Domestic Reverse VAT Charge for Building and Construction Services (DRC) went into effect. Here is all you need to know about this change from the construction accountants here at F9.

The DRC affects businesses that provide construction services in the United Kingdom (UK). If you are a business that provides construction services, you will now be required to charge VAT on your services. The customer will then be responsible for paying the VAT to HM Revenue and Customs (HMRC).

If you are a business that is registered for VAT in the UK, you can recover the VAT charged on your construction services. You will need to file a quarterly return with HMRC to do this.

The Domestic Reverse Charge does not apply to businesses that are not registered for VAT in the UK. These businesses will continue to charge and pay VAT in the usual way.

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DRC Background

This law is designed to prevent fraudulent trading in the construction sector, in the same manner as the earlier introduced domestic reverse charges for computer chips and mobile telephones.

A VAT-registered business that provides certain construction services to another VAT-registered firm for onward sale is required to produce a VAT invoice stating that the service is subject to the domestic reverse charge under these standards. 

In contrast to other types of reverse charge, the value of such services will not be included in the requirement to register for VAT, which is excellent news for small firms and entrepreneurs.

What construction services are covered?

The supply of “specified services” between VAT-registered firms results in a recipient making an onward supply of those specified services covered by the reverse charge for domestic transactions. For example, the Construction Industry Scheme defines general construction operations as included in services that aren’t explicitly called out in the CIS.

The Domestic Reverse Charge has a broad reach that extends to businesses across a wide range of industries, including those that do not identify themselves as construction companies. Use the HMRC decision tree to determine whether or not your company is subject to the DRC.

Among the many types of construction work available are building construction, renovation, extension, painting and decorating, as well as the demolition of structures and civil engineering, to name a few. So, if there is a reverse charge component to a service, the whole service is subject to domestic reverse charge under the law.

Depending on whether both parties agree, if services for which you have already paid are delivered, subsequent services provided by the same provider may be covered by your domestic reverse charge policy. The first rule was intended to make it easier to make an administrative decision on whether or not to apply for the domestic reverse charge in a timely manner. In contrast, if the initial services fall under the purview of the domestic reverse charge but subsequent services do not the VAT treatment changes. As a result, businesses must review and maintain their VAT status throughout the duration of an undertaking.

The domestic reverse charge is only permitted for certain services if the condition described below is met.

• It is possible to provide the services directly to a consumer, such as a property owner, or to a main contractor who is selling or leasing a newly constructed structure directly.

• The supply chain for the end-user includes a company that receives unfinished construction services from the beneficiary.

• The recipient is either not registered for VAT or is not required to be registered.

• The recipient is not an official CIS member.

• Both the supplier and the client are either landlords or tenants, or vice versa.

• The supplies are not subject to taxation.

In this context, a “end-user” is defined as a person who receives specified services for any purpose other than the purpose of providing additional services to others. For example, suppose a business provides goods or services to an end-user who is unable or unwilling to provide written confirmation that they are an end-user (such as via email) or within the contract. In that case, the business may be eligible for a VAT exemption. Generally speaking, according to HMRC’s guidance, a supply will be included in the scope of the domestic reverse charge if it would have been standard-rated if the end-user exemption had not been in place.

It is important for individuals who are receiving construction services but who are not classified as contractors by the Construction Industry Standards (CIS) to be aware of new CIS rules that will take effect in April 2021, which may broaden the scope of the law.

The reverse charge applies to items consumed in the course of the construction work, such as building materials and supplies. The reverse charge also applies to these goods since they are provided alongside with construction services and construction work. Therefore, it is difficult to determine if a separate supply of commodities should be excluded from the reverse charge or whether they should be regarded as part of the construction work.

The reverse charge will not apply if the construction work is carried out by a taxable person who is not registered for VAT. In this case, the supplier will charge VAT on the supply in the normal way.

How will construction firms be impacted?

Small repair businesses, for example, maybe unable to pay all of their invoices immediately due to a lack of available funds. As a result, it is critical for companies that generate or acquire reverse charge supplies to maintain accounting systems in place and to conduct ongoing inspections to ensure that resources are being treated correctly. The possibility exists that suppliers will incorrectly account for VAT to HMRC and that consumers will then reclaim the VAT from HMRC, as long as the VAT amount must continue to be shown on invoices subject to the domestic reverse charge system in the UK.

Subcontractors who rely on VAT receipts from their clients as working capital are likely to be negatively impacted by the reduction in cash flow available to them. As a result, customers and suppliers of these companies should consider whether their payment terms need to be adjusted in order to avoid supply chain disruptions.

Subcontractors should also make certain that they are working for a VAT-registered company and are not working for an end-user or for someone who is associated with an end-user, such as landlords or tenants, before proceeding.

What can construction firms do to adapt to these changes?

Below are a few actions construction businesses can take:

• Materials produced and received from other VAT-registered contractors should be scrutinised to determine whether they are subject to reverse charge. They will be subject to a charge reversal beginning in March 2021.

• Customers should be informed of their status as end users and the fact that they must adhere to the applicable VAT and CIS regulations.

• Consider the impact on cash flow after March 2021 and whether there are any alternatives that could be used to mitigate the situation.

• If you no longer pay any VAT, you should consider whether it is time to switch to monthly VAT returns.

• If supplies fall below the DRC, stop using the Cash Accounting Scheme as soon as it is possible.

• Examine whether a flat-rate pricing plan is a good fit for your company’s needs.

• Consider whether it is a good idea to have suppliers purchase goods and materials in areas where their services are covered by the DRC so that you do not have to pay VAT on the items or materials you purchase.

Your next course of action

Don’t hesitate to contact the construction accountants here at F9 if you require further information on the Domestic Reverse Charge or any other VAT-related issues affecting construction, real estate, or property.

Call us on 0800 169 3278 or fill in your details below, we’re here to help!